Minimum wage and immigration

Anyone with the slightest knowledge of economics is aware what a scam a ‘minimum wage’ is. When an artificial bottom placed on hourly rates is raised ,there are only two rational responses an employer can make: fire anyone whose value is now less than their cost; or raise prices to cover the added cost of doing business.

The raising of prices following a minimum wage hike sends ripples through the economy, like those of a handful a pebbles tossed into a farm pond. At some point everything damps out and the steady state returns. No new value has been created by the higher wages so the end result is roughly enough inflation to wipe out the change.

This analysis misses a detail however. The economy does not respond instantaneously. There is a time lag during which recipients have more purchasing power. They will pay for it later of course: TANSTAAFL. But from the viewpoint of a politician if the gain can be timed to properly coincide with something of value to them, say an election, it is a win. The pain comes later and memories are shorter than the interval betwixt elections.

I realized this morning there is a way in which politicians can hide much of the pain indefinitely: illegal immigration. Think it through. Raise the minimum wage in an environment where there is cheap, willing labour, undocumented and outside the system. What is the rational employer response? Raise wages for legal employees and export the costs to the undocumented workers. Illegal immigrants are not voters so this is a win-win situation to both the ruling class and those who keep them there. The voters get a higher real wage and living standard because the inflationary cost has been shifted. The pain has been exported outside the political game.

Statist politicians cannot do anything about illegal immigration because if they stop it, the deferred inflation will cause prices to rise enough to erase the excess income of their constituents. Employers will have to either drop low end jobs or else raise prices to support them. Voters will not be happy and it is well known the wallet is a bigger determinate of election outcomes than just about anything else. So, QED, illegal immigration is now a structural requirement of the centralized Western bureaucratic state.

A second force drives the need for cheap labour: the demographic transition in modern societies leads to a lowering of birthrates and a consequent labour shortage. Some places, like Japan, are looking to solve this with robots: the real deal kind. Less closed societies are covering the short fall with immigration of both legal and illegal varieties.

There is simply no practical way out of the situation in the short run and politics is all about delaying pain in hopes it will either go away or happen after you are gone.

May 29th, 2006 |

33 comments to Minimum wage and immigration

The real farce of the minimum wage is that it improperly assumes that all regions under the minimum wage law have the same or similar cost of living.

In my area, our unemployment rate is rock bottom, the cost of living demands a living wage of over $13/hr, yet the minimum wage is what? $6.50? At the same time, all the employers (who elect local pols who enact growth control ordinances to keep competition out, and tight zoning and building ordinances to create artificial scarcities of real estate) whine about the so-called “labor shortage” that is created by the government regulations they’ve supported, since people who can’t afford to live here are not going to come here to work without sufficient wages.

A particularly good point. During all the recent noise in the U.S., everyone seems to forget that organizing a large group of people into a new serf class is just plain wrong.

Continued insistence on statist sleight of hand such as minimum wages and “free” social entitlements, coupled with a complete abdication of official responsibility to either enforce or change existing laws, is a recipe for disaster. The new serf class will come for better wages, and remain in the underclass for generations.

The interesting thing will be what would happen should amnesty come to pass in the US. Once all the aliens become citizens they too can demand the minimum wage. If employers have to choose between a worker that speaks perfect English and costs $6.50/hr and one that doesn’t speak English (or speaks it poorly) at the same wage, then guess who will win out. It is in some of these “migrant worker’s” best interest to stay off the system. For the ones that do get “in the system” and don’t have the skills to compete for higher paying jobs they will simply join the ranks of the perpetually unemployed welfare mooches.

Neither outcome benefits anyone but the politicians that are pandering for votes and clout. The American people will take it up the ass with both outcomes.

Asian countries will be the next economic powerhouses, because they don’t have labor shortages that require importing vast numbers of people of a differant culture. The homogeneous nature of those countires will give them greater stregnth when the rest of us are at war with our own populations.

An interesting post, and quite convincing. A tangential thought occurred to me, though, regarding the closing: “[P]olitics is all about delaying pain in hopes it will either go away or happen after you are gone.” This is often a relatively good strategy (the devil is in the particulars, of course), or at least rational, for a given amount of brazenness. Specifically, isn’t this the techno-optimist solution to environmental problems (in part vindicated already by improving environmental conditions in for example the United States)?

All this is to say, that while the quoted characterization of politics is no doubt accurate, it is not particularly a statist failing, and even the “failing” part is a bit ambiguous. In the case of illegal immigration, the problem is not so much political paralysis (quite preferable in fact to active social engineering), as the bit about illegality.

1. Theoretically all businesses are profit-maximisers, so are charging the optimal prices already. The fan of minimum wages tends to hold this view more strongly than conventional economists: he sees firms as rapacious. The choice in such a ‘perfect’ market when labour costs rise is not between sacking people and raising prices, it is between sacking people and raising prices AND sacking people.

2. It would be interesting to know whether there’s a strong correlation between illegal immigration and ‘illegal working’ generally and the presence of minimum wages. Where work needs doing but one can’t afford to get anyone to do it legally, then the labour pool is only those not permitted to work otherwise.

Likewise with elaborate benefits systems. Anti-immigrant rhetoric is often based on the idea that ‘they are coming here to get their hands “our” benefits’ (even Prospect is now at it). But could it not equally be that benefits systems (combined with ill-moderated tax systems) act just as minimum wages do, and create a market below the bottom, below the omney-for-nothing level, which can only be satisfied by those working illegally?

“Raise wages for legal employees and export the costs to the undocumented workers. Illegal immigrants are not voters so this is a win-win situation to both the ruling class and those who keep them there. The voters get a higher real wage and living standard because the inflationary cost has been shifted. The pain has been exported outside the political game.”

Why is this a bad thing?

“there are only two rational responses an employer can make: fire anyone whose value is now less than their cost; or raise prices to cover the added cost of doing business”

— assuming, of course, that you include the multi-million (often multi-tens-of-millions) compensation of the CEO’s. But really, how often is firing such SINCERELY considered a legitimate option?

“llegal immigration is now a structural requirement of the centralized Western bureaucratic state.”

Interesting question. I can only guess that Dale feels remorse over the lack of workers rights enjoyed by the immigrants, but that seems unlikely. Dilution of the rule of law by including illegality in the structure of the bureaucracy? Sounds more likely. Dale?

Immigration as presently operated is a high-pass filter. It blocks anyone who is obeying the laws of their future host nation and planning to pay taxes etc, while only letting through the ones who put the most energy into breaking the law and not paying taxes, etc.

By making it harder to get a job as a citizen than as an illegal, minimum wages make nonsense of the “path to citizenship” argument. And increasingly, it seems, illegals don’t want to become US citizens, certainly not if it means paying a fine, learning English, paying taxes and abiding by a host of regulations. Why should they, since they know the laws aren’t going to be enforced? And we’ll all be Mexicans before long.

Here in Australia we have a minimum wage that was controlled until just this year essentially by union lackeys. And yet unemployment is low (we actually have critical skills shortages, we’re attempting to import skilled workers), so is inflation and our economy is one of the strongest in the world right now – we’ve been defying the global downturn for years. Our budget has been in surplus every year for four consecutive parliamentary terms (they’re longer than yours too), so much so that we’ve now completely paid off our budget deficit.

We also have practically zero illegal immigration. So “QED, illegal immigration is now a structural requirement of the centralized Western bureaucratic state”: not so much.

jim, if you’ve now completely paid off your budget deficit, that’s probably why your economy is “one of the strongest in the world right now”, and why you are bucking world wide trends. As opposed to the other way around which would be that bucking the trends caused your deficit to be paid off.

Which obliterates the entire article. Illegal immigration is most insubstantial to Australia. And I think the poster would argue that Australia is part of the centralized western buerocracy. What a load of rubish.

Minimum wage is slightly more complex than “sack everyone under the threshold”. It cuts out 3 zones. 1st, people who aren’t worth that much ever, they’re sacked or black market. 2nd, people whose market rate is below the minimum, but whose absolute productivity is above, they get a raise. Third, everyone else, affected only indirectly because the employer’s got less money to spend and more work to share around. Could come out of prices, but in the real world prices aren’t so flexible, so it’s more likely to come out of investment and hiring. It’s one contribution to the New Labour economy, where productivity is racing along but nobody ever seems to get much of anywhere.

Julian Morrison, I’d like to add one catagory to those three. Beginning employees who are not yet worth that much but, given the opportunity to learn and develop job skills in a below minimum wage paying job, may soon become worth much more.

I think we both know that Australia IS an exception. And I think this ‘exception’ has blown a gaping whole in your whole immigration:minimum wage theory. Why should I believe this is the rule anywhere else when it clearly isnt in Australia? Which factors could possibly so different? You all arent doing a very good job of convincing me.

So by that logic, if something is not universally the case everywhere, it cannot be true anywhere? I take it you are not an economist! Do you really not understand the notion that some negatives (such as minimum wage legislation distortions of the labour market) might be out weighed by other completely separate economic positives in some economies but not others? Is that really such a tough concept to grasp?

And that also does not even touch on Australia’s atypical geographic advantages when it comes to controlling immigration, an advantage which Britain could, but inexplicably does not, emulate (at least to some extent) if the powers that be wished, which they clearly do not.

It is interesting that Australia has been successful in avoiding the trap, but that does not mean the trap does not exist. It also means your minimum wage is of little consequence to the economy since raising or lowering it will not change anyone’s purchasing power for long, which is the first part of my discussion.

It is only if you fall into the trap of high illegal immigration as a sink for the inflationary pressure that my second argument comes into play.

Would that more people could see the destructive effects of the kind of social democracy we see in politics now. Speaking of which, I’m getting attacked on another forum over my criticism of the Human Rights Act – a BBC blog no less – HERE. Feel free, fellow libertarians, to leave some sensible remarks!

You didn’t understand my point. Changing minimum wage just does not do much of anything except help people get elected. I could by fiat tomorrow declare that all pounds were now worth ten pounds. The net effect would be… nothing. I could tomorrow declare by fiat that all wages will be doubled. After a short sorting out period, the net effect would be… nothing. In neither case will anyone, on average, be any richer than they were before the change.

Now I am sure there are some sideeffects that a professional economist might point out, things caused by some assets being locked in, effects on exchange rates and import/exports… I suspect none of those would be good.

My prediction for the UK is that enough illegals will find employment such that the minimum wage will give UK voters a real increase in buying power… born by the underclass who soak up most of the inflationary pressure.

Perhaps someone from the Adam Smith Institute or some school (many are our readers) will go off and do some serious academic research and see if I my supposition is really on the mark.

A minimum wage also creats a division between those who keep the minimum jobs and those can can’t get one. Just like a union. Good for those employees who get the job bad for everyone else. The worst kind of rent seeking.

The answer to your question is easy. A change in minimum wage affects everyone equally… the end result is that everyone, where ever they are in the country, ends up with the same purchasing power they had before the change.

There would also be complex affects on balance of trade between different regions, unmitigated by exchange rate adjustments. That could get complex and worth an article all by itself.

Good argument, excerpt that I’ve never, in all my years in California nor in my recent time as a citizen of the Republic of Texas, seen an illegal working for minimum wage or less.

The actual savings, if any*, are gotten by the fact that an undocumented workers don’t have to have matching contributions to various government programs.

The general point remains the same – the problem isn’t really illegals so much as the government nanny-system. Without such a system, there would be no need to prevent people from coming here – and, obviously, no shortage of cheap labor.

Pipe dreams, though, the government will continue to slide into ruin until the whole thing collapses on their silly heads.

In reply to Jims comments, Australia did have an illegal immigration problem, although not on the scale of the USA. Things to keep in mind are that a) we are geographically isolated with no common border with any neighbouring nation b) we have a policy of deporting asylum seekers who arrive by boat and only allowing them into the country if their request for asylum is approved and c) in general we have good political and especially law enforcement links with Indonesia, through which most of the previous asylum seekers staged, and we are able to prevent illegal immigrants from leaving the host country. The death of several hundred prospective illegal immigrants on the SIEIV X when it foundered between Indonesia and Australia probably had a lot to do with custom drying up for the passage brokers.

Australia also does not have a large indigenous population of indonesian descent for local illegals to blend in with, many of the illegal immigrants who did arrive by boat were from asian or arabic cultures and were sponsored by family members who had immigrated legally in the past. The distances to be travelled are much greater than in the continental USA, and with the exception of Darwin, there are no large population centres for several thousand kilometres from the northern shores.

The USA has a problem is so far as the Mexican govt. encourages illegal immigration to the USA. When the Indonesian govt. was doing the same, Australia also had a problem but on a smaller scale, due to logistics.

Economically, Australia has benefited from the growth of China, with exports of raw materials such as iron ore and liquid petroleum gas adding roughly $5,000 per capita to GDP. Without the tax revenue from this export bonanza, Australia’d govt would be much worse off. The govt had also greatly increased the overall percentage of GDP taken in tax revenue over the last ten years, allowing it to play the welfare game and pay off debt.

Dale,
The big problem I see is your assertion that minimum wage effects everyone equally. As you say, if you by fiat doubled everyone’s salary overnight, the sorting out effect would be over quickly, and we’d all be back to where we started.

But that’s not whats happening here. Closet Libertarian is closer to what is happening, even though he is against it.

An increase in minimum wages will likely funnel more money to those at the bottom end of the wage scale. Yes, some people will get fired, or never hired. Also more robotization will occur (generally a good thing that). But for the poor fellow making 6.50 an hour he will most likely be making 7.00 dollars an hour.

Yes, this means that a lot of service industry dependent places (McD’s and your local grocer) will have to increase prices. I’m going to be doubtful that this increase is enough to wipe out Poor Fellow’s modest increase.

What is happening to summarize is a basic redistribution of wealth.

And I will be happy to support getting rid of this right after the rich show leadership in getting rid of their illicit use of tilting the economic table in their favor. It seems unfair to expect Poor Fellow to go first before corporate welfare, special tax breaks, and all the other ninety-nine tricks and schemes the Rich Man has up his sleeve, courtesy of the government.

Where does this benefit magically appear from? Are you saying the high paid engineer is going to notice a change in his or her buying power and then decide not to push to recover it, just to be nice?

Or are the stock holders going to say, “Oh those poor low wage people deserve our dividends more than we do”? Or any of the other stake holders is not going to fight like a bloody cornered cat to recoup their inflationary losses?

And even if it were so, you are justifying theft. It is just the old Robin Hood idea that you can go out and steal from someone you have decided has “too much” and then give some part of it (after you deduct the costs of your arrows, wenches and parties) to whomever you happen to feel are “deserving”.

Increase the price of labour and the employer’s demand for it will fall. Sounds plausible doesn’t it? Simple supply and demand economics surely?

Well no, actually, unfortunately for you libertarian neo-conservatives, your model is far too simple (and I suspect at least some of you know this).

People are not loaves of bread. If you increase the price of a loaf of bread, it is still the same loaf of bread, so demand will obviously fall (except in giffen good cases etc.).

But increase the price of labour and wonderful things can happen; labour turnover falls, motivation of workers can increase, lazy managers can’t get away with ignoring their low paid workforce as better trained and organised staff are needed to justify the higher salaries, and yes (as Tennwriter has mentioned) more robotization. All these things increase productivity and are a good thing not just for the added efficiency but also for social cohesion as it reduces inequality.

But, you may ask, surely employers aren’t stupid, they will train their workforce better and increase robotization anyway if it improves efficiency? The market will demand it surely?

Afraid not. Any employer that unilaterally decides to do this (unless they have massive reserves of capital and long term foresight which most companies don’t have) will in the short term place themselves at significant disadvantage and added risk. Very few (if any) will do this even though it might be in their long term interest.

This is where governments come in to provide a regulatory framework for the market to work properly (all economic miracles UK, US, Japan etc. were based on government support – even initial protectionism, definitely NOT laissez-faire).

When a minimum wage is set, companies have to compete more on innovation of production/service, organisation and training of its staff, which is in the long term interests of all of us.

Minimum wage and immigration interfere with the labor market’s essential function of directing human talent. Minimum wage lessen our overall wealth by decreasing the production of valuable services. If there’s a bad thing about minimum wage, their is also good about it, it lessen illegal immigration.

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